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Factor demand flexibility in the primary aluminium industry: Evidence from stagnating and expanding regions

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  • Blomberg, Jerry
  • Söderholm, Patrik

Abstract

The purpose of the paper is to analyse and compare short-run factor demand responses to price changes in the primary aluminium industry in Western Europe and the Africa-Middle East (AME) region. We outline a Translog variable cost function model, which is estimated employing a panel data set at the individual smelter level over the time period 1990-2003. The empirical results show evidence of limited - but far from insignificant - price-induced factor demand responses in the short-run. Overall aluminium smelters in the AME-region show evidence of higher estimated short-run own- and cross-price elasticities than their competitors in Western Europe, at least when it comes to labour and electricity demand. One important reason for this result is the greater number of pot lines with slightly different technologies at each smelter as well as the more intense use of the Prebake technology in the AME-region making retrofits in existing plants less costly than in Western Europe. The results also suggest that in both regions the demand for electricity has over time become less sensitive to short-run price changes, while the labour and material demand responses to price changes have increased but only in the AME-region. The liberalisation of the Western European electricity markets in combination with the rigid labour markets in this part of the world suggest that the shift in production capacity from the western world to the AME-region as well as China may continue.

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Bibliographic Info

Article provided by Elsevier in its journal Resources Policy.

Volume (Year): 36 (2011)
Issue (Month): 3 (September)
Pages: 238-248

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Handle: RePEc:eee:jrpoli:v:36:y:2011:i:3:p:238-248

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Web page: http://www.elsevier.com/locate/inca/30467

Related research

Keywords: Aluminium Short-run factor demand Translog cost function Western Europe Africa and the Middle East;

References

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  1. Soderholm, Patrik, 2000. "Fuel flexibility in the West European power sector," Resources Policy, Elsevier, vol. 26(3), pages 157-170, September.
  2. Jan Larsson, 2003. "Testing the Multiproduct Hypothesis on Norwegian Aluminium Industry Plants," Discussion Papers 350, Research Department of Statistics Norway.
  3. Tsekouras, K. D. & Zagouras, N. G., 1998. "A cost function of Greek non-ferrous metal industry," International Journal of Production Economics, Elsevier, vol. 56(1), pages 621-640, September.
  4. Robert Gagne & Carmine Nappi, 2000. "The cost and technological structure of aluminium smelters worldwide," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 15(4), pages 417-432.
  5. Guilkey, David K & Lovell, C A Knox & Sickles, Robin C, 1983. "A Comparison of the Performance of Three Flexible Functional Forms," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 24(3), pages 591-616, October.
  6. Ann F. Friedlaender & Ernst R. Berndt & Judy Shaw-Er Wang Chiang & Mark Showalter & Christopher A. Vellturo, 1991. "Rail Costs and Capital Adjustments in a Quasi-Regulated Environment," NBER Working Papers 3841, National Bureau of Economic Research, Inc.
  7. Christensen, Laurits R & Jorgenson, Dale W & Lau, Lawrence J, 1973. "Transcendental Logarithmic Production Frontiers," The Review of Economics and Statistics, MIT Press, vol. 55(1), pages 28-45, February.
  8. Morrison, Catherine J, 1988. "Quasi-Fixed Inputs in U.S. and Japanese Manufacturing: A Generalized Leontief Restricted Cost Function Approach," The Review of Economics and Statistics, MIT Press, vol. 70(2), pages 275-87, May.
  9. Berndt, Ernst R & Wood, David O, 1975. "Technology, Prices, and the Derived Demand for Energy," The Review of Economics and Statistics, MIT Press, vol. 57(3), pages 259-68, August.
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Cited by:
  1. Mansikkasalo, Anna & Lundmark, Robert & Söderholm, Patrik, 2014. "Market behavior and policy in the recycled paper industry: A critical survey of price elasticity research," Forest Policy and Economics, Elsevier, vol. 38(C), pages 17-29.

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